May 28, 2010
May 28, 2010
|The new reserve currency?|
Jim O’Neill, who did not make any friends within the bear community earlier today, has written an interesting paper on the IMF’s Special Drawing Rights, and whether this hypernational currency can ever become a reserve currency as is, and/or with the CNY as a constituent member. While O’Neill as usual focuses on the angle of the “next paradigm” BRICs, and how they will increasingly dominate global economics, he does pose an important question: with the dollar likely to suffer the side effects of either hyperdeflation, hyperinflation, or hyperstagflation, will the next reserve currency be a diluted melange of other flawed fiat constructs (i.e., the SDR), or the currency of the one country, which for all its flaws, still has the cleanest balance sheet backing its own fiat construct. On the other hand, the question of whether this analysis is moot to begin with, and the world will revert to the gold standard as the ongoing crisis of confidence in all paper money flares up, is not raised even once… We wonder (not really) what Jim O’Neill would have to say on that particular issue.
Here are the main bullets:
— The issue of the ‘international reserve currency’ and the possible role of the IMF’s Special Drawing Rights (SDR) has moved from obscurity to the centre of discussions about the future.
— Given China’s importance in terms of its share of world trade, the CNY should now be part of the SDR. The case for including it can only become more obvious as this decade progresses.
— However, actually including the CNY as a constituent of the SDR is likely to remain a challenge without the CNY becoming more widely used internationally, including as a reserve asset.
— The case for including other BRIC currencies in the SDR, especially the RUB, is also likely to become stronger over the coming decade.
— Although the Dollar will probably not be as dominant in 2020 as it is today, it is far from clear that it needs to be replaced by the SDR—or by anything else—as the main reserve currency.
— For the SDR to be attractive to private users, it will need to include the CNY and possibly other BRIC currencies. However, this alone would not guarantee that the SDR would be more attractive to private investors.
The paper is a critical follow up to anyone who found Albert Edward’s earlier analysis of collapsing global FX reserves relevant.